by Brianna McGurran
August 13, 2020
by Brianna McGurran
August 13, 2020
The Federal Reserve cut interest rates to near-zero in March, making it less expensive for consumers to borrow money as a way to limit the coronavirus impact on the economy. That means you’ll likely see your credit card APR get cheaper, and so will interest rates on mortgages, auto loans and student loans.
If you’re currently paying down student loans, several private lenders offer the option to refinance them to a lower interest rate if you qualify. That might sound enticing right now since rates will dip across the board. But depending on your credit, income and job situation, refinancing — particularly if you have federal loans — could be a risky move.
Here’s how to know if it’s right for you.
When you refinance a student loan, a lender evaluates your finances and, if you meet its requirements, replaces your previous student loan with a new one at a potentially lower interest rate. That can save you money over time, especially if you also opt for a shorter repayment timeline and can pay off your loan faster, with less interest accumulating.
Not everyone will qualify for student loan refinancing. Lenders typically require a credit score in the good or excellent range, which is 670 or higher on the FICO credit scoring model’s 850-point scale. They’ll also want to see strong income and a low debt-to-income ratio to ensure you can make your payments.
While refinancing can mean big savings — especially on high-interest private loans you took out during a period when rates weren’t so low — there are some significant downsides.
The biggest is that refinancing federal student loans will disqualify you from hugely beneficial federal repayment programs, which you might need now more than ever. Only private lenders offer student loan refinancing, which means any federal loans will turn private when you refinance them.
That means you’ll lose access to:
While it’s natural to explore ways to save money in the environment we’re in now, don’t rush into refinancing just to lock in a lower interest rate. Ask these questions first:
First, identify if you have federal loans, private loans or a mix. You can figure that out by logging into your Federal Student Aid account. (You’ll need an FSA ID; create one if you don’t have it yet.) Once you’re logged in, you’ll be able to view your outstanding federal student loans and other important information, including the company that collects your payments on behalf of the government.
You can find your private student loans by checking your credit report; it will list all your current credit accounts, including student loans, plus their balances and originating lenders. Any student loans on your credit report that aren’t listed in your Federal Student Aid account are private loans.
While the coronavirus’ economic impact won’t last indefinitely, it could affect your income in the short term, making it more likely that you’ll need federal student loan protections. Before refinancing, consider your individual financial situation in the next three months to a year:
If you’re concerned about job security or your ability to afford other bills and loan payments, avoid refinancing federal loans. You may need to take advantage of income-driven repayment, deferment or forbearance, and losing those options could mean falling behind. Right now, limiting the potential fallout from lost wages is more important than taking advantage of a rate cut.
While federal loans may not be safe to refinance right now, private loans are a different story. You could stand to save money with a lower interest rate, without the risk of losing federal loan protections, and your new lender might also provide better terms than what you previously received.
For instance, some private lenders charge borrowers to sign up for forbearance, says Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. If your current lender does so, you could refinance to a new lender that charges fewer fees, or that offers more flexible forbearance options.
Or, you could independently refinance a private loan that currently includes a co-signer. That would make you the only borrower on the new, refinanced loan, releasing your co-signer from the responsibility of potentially covering payments if you can’t. Parents who co-signed your student loans and who are in or near retirement — with their own concerns about affording bills — could benefit, for example.
No matter the case, make sure you’re sure you’ll be able to make payments as planned to a new lender before refinancing. You’ll save the most money on interest if you can refinance to as short a loan term as you can manage; five years, for instance, is a common term refinance lenders offer. But right now isn’t the time to take risks with your money. There’s no rush to refinance, this week or in the future — focusing on your health, protecting your emergency fund and ensuring you can cover necessities like housing and food could be the better call for now.